Real Estate Fin Report Oct 11

Microsoft Word - Real Estate Fin Report Oct 11.docLOCAL COUNSEL OPINION LETTERS IN REAL ESTATE FINANCE TRANSACTIONS
A SUPPLEMENT TO THE REAL ESTATE FINANCE OPINION REPORT OF 2012
A Report of:
the American Bar Association Section of Real Property, Trust and Estate Law, Committee on Legal Opinions in Real Estate Transactions
the American College of Mortgage Attorneys, Opinions Committee
the American College of Real Estate Lawyers, Attorneys’ Opinions Committee∗
Editors’ Synopsis: The Report on Local Counsel Opinion Letters in Real Estate Finance Transactions supplements the Real Estate Finance Opinion Report of 2012 (2102 Report), which provided an update on the practice of opinion givers and recipients in a real estate finance transaction from the perspective of sole transaction counsel. Local counsel typically are involved in discrete and often disconnected pieces of these transactions. However, the scope of opinions expressed in a local counsel’s opinion letter cover many of the same topics addressed by lead counsel as well as other topics. The Report builds on the foundation of the 2012 Report to explore the role of local counsel, specific language of opinions local counsel may render, modification of assumptions on which opinions are based, and appropriate limitations
∗This Supplement was prepared by a Joint Drafting Committee comprised of
William B. Dunn, Grand Rapids, Michigan (Reporter), Edward J. Levin, Baltimore, Maryland (Co-Editor), Sterling Scott Willis, New Orleans, Louisiana (Co-Editor) and Edward N. Barad, Denver, Colorado; Kenneth P. Ezell, Jr., Nashville, Tennessee; Catherine T. Goldberg, Albuquerque, New Mexico; Raymond S. Iwamoto, Honolulu, Hawaii; Kenneth M. Jacobson, Chicago, Illinois; Robert J. Krapf, Wilmington, Delaware; Charles L. Menges, Richmond, Virginia; David L. Miller, McLean, Virginia; Laurence G. Preble, Denver, Colorado; Lydia C. Stefanowicz, Woodbridge, New Jersey; Robert A. Thompson, San Francisco, California, and Lawrence J. Wolk, New York, New York. This Supplement does not render legal, tax, or accounting advice. This Supplement has been approved by the Committees but does not necessarily represent the position of the bar organizations of which the Committees are a part. Further, this is a collaborative work reflecting an overall consensus of the Joint Drafting Committee and of the Committees, but not necessarily reflecting the views of any given individual as to the treatment of any particular issue. The members of the Joint Drafting Committee and of the Committees reserve the right to assert contrary or other positions with regard to the issues discussed in this Supplement.
2 51 REAL PROPERTY, TRUST AND ESTATE LAW JOURNAL
of opinions. The text illustrates assumptions, opinion statements, and limitations in an Illustrative Opinion Letter Addendum. In addressing the subject, the Report is the first that focuses exclusively on opinion letters of local counsel. The text provides many citations for further reference. The Report represents the collaborative effort of bar members of many jurisdictions, as members of three national bar organizations.
INTRODUCTION ....................................................................................... 3 EARLIER REPORTS AND REFERENCES ....................................................... 5 CONTEXT .................................................................................................. 6 PROFESSIONAL RESPONSIBILITY ............................................................. 13 I. INTRODUCTION AND BACKGROUND OF THE OPINION
LETTER ........................................................................................ 15 A. Introductory Matters. .............................................................. 15 B. Background of the Opinion Letter. ......................................... 15 1.0 Role of Opinion Giver as Local Counsel. ........................ 15
1.1 Defined Terms; List and Definition of Transaction Documents ........................................................................ 15
1.2 Authority Documents ....................................................... 15 1.3 Opinion Jurisdiction ......................................................... 19 1.4 Scope of Review .............................................................. 20 1.5 Reliance on Other Sources Without Investigation ........... 20 II. ASSUMPTIONS ............................................................................. 20 III. OPINIONS ..................................................................................... 25 3.1 Status – Existence and Good Standing ............................. 26 3.2 Power ................................................................................ 28 3.3 Authorization .................................................................... 29 3.4 Execution and Delivery .................................................... 30 3.5 Enforceability ................................................................... 32 3.6 Form of Documents .......................................................... 39 3.7 No Breach or Violation of Organizational Documents
or Other Obligations ......................................................... 48 3.8 No Violation of Law ........................................................ 48 3.9 Choice of Law .................................................................. 48 3.10 Usury ................................................................................ 50 3.11 Legal Proceedings Confirmation ...................................... 51 3.12 Recording and its Effect ................................................... 52 3.13 No Governmental Approvals Required ............................ 54
FALL 2016 Local Counsel Opinion Letters 3
3.14 Effect of Exercise of Remedies ........................................ 57 3.15 All Customary or Specific Remedies ............................... 60 3.16 Recipient Party Matters .................................................... 61 3.17 Zoning and Land Use, Compliance with Laws ................ 62 3.18 Negative Assurance .......................................................... 63 IV. CERTAIN LIMITATIONS ............................................................. 63 4.1 Bankruptcy Exception ...................................................... 64 4.2 Equitable Principles Exception ........................................ 64 4.3 Generic Enforceability Qualification, with Assurance .... 64 4.4 Other Transaction-Related Qualifications ........................ 65 4.5 Other General Qualifications ........................................... 65 4.6 Exclusions ........................................................................ 68 4.7 Knowledge ....................................................................... 68 V. USE OF THE OPINION LETTER ................................................. 68 5.1 Use and Reliance .............................................................. 68 5.2 Effective Date; No Obligation to Update ......................... 72 5.3 Governing Law ................................................................. 72 5.4 Disclaimer of Implied Opinions ....................................... 73 5.5 Expression of Professional Judgment .............................. 73 5.6 Signatures ......................................................................... 73 ADDENDUM - ILLUSTRATIVE OPINION LETTER .............................. 74
INTRODUCTION This Supplement to the Real Estate Finance Opinion Report of 20121
is prepared to assist lawyers who do not have overall transaction responsibility but who express legal opinions2 in real estate financing transactions on subjects governed by the law of a specific jurisdiction, often with limited knowledge of the transaction. These lawyers are referred to as “local” counsel.3
1 See Joint Drafting Committee, Real Estate Finance Opinion Report of 2012, 47
REAL PROP. TR. & EST. L. J. 213 (2012) [hereinafter 2012 Report]. 2 The term “legal opinion” in this Supplement refers to a legal evaluation provided
in writing (an “opinion letter”) by a lawyer or law firm (the “opinion giver”) to a party (the “opinion recipient”) who is not a client of the opinion giver (referred to as a “third- party”) with respect to the subject matter of the evaluation in a financing transaction secured by real estate in the United States.
3 The 2012 Report and this Supplement focus on opinions about applicable law of a jurisdiction. Counsel may also be needed to provide opinions about specific legal issues in a transaction, such as substantive non-consolidation, specialized tax, or regulatory
The 2012 Report presents a discussion about legal opinions expressed in third-party opinion letters provided in real estate finance transactions by a lawyer or law firm on behalf of a transaction party, usually a borrower or a guarantor, to a nonclient transaction party, typically a lender. The legal opinions, along with customary assumptions and limitations4 pertaining to them, were compiled in the setting of such an opinion letter as illustrated in Illustrative Language of a Real Estate Finance Opinion Letter provided with the 2012 Report (the 2012 Illustrative Language).5 The discussion of topics that may be commonly the subject of such an opinion letter in the 2012 Report is in the context of a single opinion letter from one opinion giver, referred to in the 2012 Report as “lead” counsel, for an obligor party.6 The 2012 Report expressly did not address opining situations and conventions for “local” counsel.
For ease of reference, the subject matter considered in this Supplement generally follows the organization of the 2012 Report. This Supplement does not repeat what is contained in the 2012 Report. It incorporates much of the 2012 Report by reference and presents content within the context of the 2012 Report. The reader should have access to the 2012 Report and have familiarity with it. This Supplement presents certain additional subject matter when applicable to opinion letters provided by local counsel. This Supplement also discusses certain common issues that will be addressed in preparing a local counsel opinion letter that differ from preparation of a single comprehensive opinion letter as described in the 2012 Report. All opinion practitioners in commercial real estate finance transactions, regardless of their role, will find subject matter of general applicability in this Supplement.
matters. These counsel are more properly referred to as “special” counsel rather than local counsel. See 2012 Report, supra note 1, at 228.
4 The term “limitations” encompasses exceptions, exclusions, qualifications, and other limitations. See 2012 Report, supra note 1, at 251. That same convention is used in this Supplement.
5 See 2012 Report, supra note 1, at 261–73. The 2012 Report notes, on pages 223– 24, that the 2012 Illustrative Language is not a recommended or preferred form of all or any part of an opinion letter, but a collection of sample opinion statements, and assumptions and limitations relevant to them. The text of the 2012 Illustrative Language is to provide context for the 2012 Report, and there are many other expressions possible and in some cases desirable.
6 Lead counsel typically have overall transaction or client responsibility beyond providing an opinion letter.
EARLIER REPORTS AND REFERENCES
The 2012 Report updated and expanded upon earlier work focused on opinions given in finance transactions secured by real estate in the United States, much of which has been strongly influenced by the Third- Party Legal Opinion Report of the ABA Business Law Section, which included a Legal Opinion Accord (the Accord),7 published in 1991. The Accord did not address opinion matters relating to secured transactions and was not wholly consonant with third-party opinion practice in real estate transactions. However, it appeared to represent a great step forward in a consensus for opinion practice in general, and especially in multijurisdictional transactions where common understanding was desirable. From that premise, the ABA Section of Real Property, Probate and Trust Law (the ABA Section, now known as the Section of Real Property, Trust and Estate Law) and the American College of Real Estate Lawyers (ACREL) appointed a Joint Drafting Committee to adapt the Accord to real estate secured transactions. A Report on Adaptation of the Legal Opinion Accord was published in 1994 (the Accord Adaptation Report).8
In 1999, the ABA Section and ACREL prepared an Inclusive Real Estate Secured Transaction Opinion (the Inclusive Opinion).9 This product was intended to demonstrate what an opinion letter in a real estate secured transaction would look like if the principles and content of the Accord as modified by the Accord Adaptation Report were fully expressed within the four corners of an opinion letter rather than in a separate set of rules and protocols.
The Accord itself did not achieve widespread endorsement or acceptance among members of the business bar, and the focus of that bar shifted to stating Guidelines10 and Principles11 for opinion practice, and
7 See Committee on Legal Opinions, Third-Party Legal Opinion Report including
the Legal Opinion Accord, of the Section of the Business Law, American Bar Association, 47 BUS. LAW. 167 (1991) [hereinafter ABA Business Law Accord Report].
8 See Joint Drafting Committee, Report on Adaptation of the Legal Opinion Accord, 29 REAL PROP. PROB. & TR. J. 569 (1994).
9 See Inclusive Real Estate Secured Transaction Opinion (Feb. 2, 1999), http//:apps. americanbar.org/dch/thedl.cfm?filename=/RP213000/newsletterpubs/incl_article.doc.
10 See Committee on Legal Opinions, Section of Bus. Law of the ABA, Guidelines for the Preparation of Closing Opinions, 57 BUS. LAW. 875 (2002) [hereinafter Business Opinion Guidelines].
11 See Committee on Legal Opinions, Section of Bus. Law of the ABA, Legal Opinion Principles, 53 BUS. LAW. 831 (1998) [hereinafter Business Opinion Principles].
to relying on concepts of customary practice12 recognized among experienced practitioners rather than on express conventions of meaning and verbiage. The business bar also placed increasing reliance on the work of the TriBar Opinion Committee, which published its first report on third-party opinion practice in 197913 and has published numerous reports on the subject since then.14 In 2003, the real estate bar published Guidelines15 built on and incorporating the Business Opinion Guidelines and Business Opinion Principles.
CONTEXT
In themselves, the labels “lead” and “local” have insufficient inherent meaning to determine without more information what opinions each counsel would provide. The labels more appropriately describe a hierarchy of relationship in the transaction than determine the scope of each such counsel’s opinion letter. The legal matters to be addressed in an opinion letter of local counsel often are not as comprehensive as those matters on which lead counsel opines. The menu of opinions is substantially the same, however; and which opinions will be given by lead or by local counsel will depend on the facts and circumstances of each transaction.
The lawyer described as “lead counsel” in the 2012 Report typically is retained directly by the Borrower16 to negotiate the transaction terms
12 See Statement on the Role of Customary Practice in Preparation and Understand-
ing of Third-Party Legal Opinions, 63 BUS. LAW. 1277 (2008) [hereinafter Customary Practice Statement].
13 See Legal Opinions to Third Parties: An Easier Path, 34 BUS. LAW. 1891 (1979). 14 The ABA Business Law Section and the TriBar Committee provide a Legal
Opinions Resource Center that contains reasonably comprehensive reference to many reports and other resources on opinion letter practice, accessible at http://apps.american bar.org/buslaw/tribar/.
15 See ACREL Attorneys’ Opinion Comm. and ABA Section of Real Prop., Prob. and Tr. Law Comm. on Legal Opinions in Real Estate Transactions, Real Estate Opinion Letter Guidelines, 38 REAL PROP. PROB. & TR. J. 241 (2003) [hereinafter Real Estate Opinion Guidelines].
16 This Supplement chooses the single term “Borrower” solely for convenience to refer to the obligor party or parties about which the opinion letter is provided. This Supplement does not provide multiple opinion statements about multiple parties. The 2012 Report referred to both a borrower and a guarantor as the parties about whom the opinion letter may be provided, noting that an opinion letter for both could be problematic in terms of conflicting interests (see 2012 Report, supra note 1, at 219), and it provided separate opinion statements for each when applicable. Collectively, these parties were referred to as “Credit Parties.” See id. at 227. Other reports refer to the party
and contents of the documents, and lead counsel establishes the primary lawyer-client relationship with the Borrower. In transactions involving matters governed by the law of more than one jurisdiction,17 lead counsel or a transaction party may arrange for one or more local counsel opinion letters that, together with lead counsel’s opinion letter, provide a comprehensive evaluation to the opinion recipient concerning the parties to the transaction, agreements of those parties, and security for a loan. Local counsel is customarily engaged by lead counsel on behalf of the obligor transaction party (the Borrower) to provide opinions that lead counsel cannot, does not, or should not provide. In many instances, local counsel has no direct contact with the Borrower, but only with lead counsel as the Borrower’s agent or representative.
Most commonly, a local counsel opinion letter is provided in a transaction that involves multiple jurisdictions at least one of which is outside the competence of lead counsel. Such examples include (i) when real property interests securing a loan are located in the jurisdiction where local counsel, but not lead counsel, is admitted to practice, and the lien or security interest in those real property interests provided in a transaction document18 is governed by the law of that jurisdiction (referred to in this Supplement as the “Local Opinion Jurisdiction” and in the Illustrative Opinion Letter as the “State”);19 or (ii) when a party20 to for or about whom the opinion is provided as the “Client.” In an opinion letter, the role of the obligor party in the transaction (e.g., “borrower,” “guarantor,” or “mortgagor”) would be substituted as appropriate, as in the Illustrative Opinion Letter. See, e.g., id. When the opinion letter opines about multiple parties, it is recommended that each be identified by role and made the focus of separate opinion statements in the opinion letter, as in the Illustrative Opinion Letter.
17 These matters are referred to as “multijurisdictional” in this Supplement. See supra, Part I.A. This broad term is used to denote transactions involving a recipient party in one state and a Borrower or collateral in another, as well as those involving parties in more than two states. See id.
18 The transaction document by which the security interest is to be created will be referred to in this Supplement generically as a “Mortgage,” as it was in the 2012 Report. See 2012 Report, supra note 1, at 242. The term encompasses deeds of trust, deeds to secure debt, and mortgages, and other real estate security instruments. See id.
19 The 2012 Illustrative Language uses “State” when referring to one jurisdiction and “Opinion Jurisdictions” when more than one State is involved. See id. In the text, the 2012 Report uses the word “State” to refer to a jurisdiction. The term Local Opinion Jurisdiction in this Supplement is used to identify that jurisdiction where the law is relevant to the opinions being provided in the opinion letter of local counsel. In the texts of the 2012 Report and this Supplement, the words “State” and “Local Opinion Jurisdiction” are synonymous. In the opinion letter itself, the Local Opinion Jurisdiction would be defined as the State, as it appears in the Illustrative Opinion Letter.
the transaction is organized under the laws of, or is acting in, the Local Opinion Jurisdiction. In the first setting, the local counsel opinions pertain to transaction documents. In the second setting, the local counsel opinions focus on one or more legal entities or natural persons. It is not unusual for local counsel opinions to be given as to both the transaction documents and a party, as, for example, where a party organized or acting in the Local Opinion Jurisdiction has interests in the real property in that jurisdiction in which a security interest is sought. An example of this is a guarantor organized in the local counsel’s Local Opinion Jurisdiction guarantying the debt of an affiliate that is not organized in the Local Opinion Jurisdiction, and the guarantor is encumbering real estate in the Local Opinion Jurisdiction as security for the guaranty. In such cases, an opinion letter from local counsel would address both subject matters unless lead counsel has undertaken to provide the formative opinions described in the 2012 Report.21
A prototypical example of a local counsel’s engagement would be to prepare an opinion letter about a Mortgage of real estate in the Local Opinion Jurisdiction (for example, Kansas), entered into by an entity organized in Delaware, with New York law applicable to the loan documents other than discrete issues in or involving the Mortgage. Real estate lawyers are often requested to provide legal opinions as local counsel not only in transactions the principal purpose of which is to finance the acquisition or development of real estate assets, but also in a wide variety of other financing transactions. These other transactions may not be real estate-centric but will have a real estate collateral component. Situations in which a real estate lawyer may be asked to provide legal opinions include:
• A loan to finance a specific real estate project located in the Local Opinion Jurisdiction, where some or all of the loan documents are governed by, and the Borrower is organized under, the laws of
20 The term “Party” would most commonly refer to a transaction party, a signatory
to transaction documents. It may be appropriate for local counsel to provide opinions as to affiliates or principals of a transaction party. In this Supplement, the term party when not otherwise defined or modified means any person about which an opinion is provided; and the term “third-party” refers to the recipient. For further discussion of opinions concerning affiliates and principals of a transaction party, see 2012 Report, supra note 1, at 239.
21 See id. at 237–40. Although opinions on these subjects may in some ways seem more appropriately the province of corporate lawyers, it is not unusual for a real estate lawyer’s opinion letter to include them where relevant.
the Local Opinion Jurisdiction, but the Borrower is represented in the transaction by lead counsel elsewhere.
• A loan to finance a specific real estate project located in the Local Opinion Jurisdiction, where some or all of the loan documents are governed by the laws of the Local Opinion Jurisdiction, but the Borrower is organized under the laws of a jurisdiction other than the Local Opinion Jurisdiction.
• A loan to finance one or more specific real estate projects located in the Local Opinion Jurisdiction (and perhaps other jurisdictions), where the core financing documents—the loan agreement, the note, and any guaranty—are governed by the laws of another jurisdiction (often, New York), but the Mortgage, any assignment of leases and rents, and perhaps other documents specifically related to the real estate located in the Local Opinion Jurisdiction will be governed in whole or in part by the laws of the Local Opinion Jurisdiction; and the Borrower may or may not be organized under the laws of the Local Opinion Jurisdiction.
• A credit facility consisting of loans principally for the purpose of financing the corporate activities of a Borrower, in which, as a part of the financing, the Borrower agrees to secure the credit facility by encumbering all of its assets, including real property that it or its subsidiaries own in the Local Opinion Jurisdiction (and perhaps other jurisdictions). In such a case the core financing documents— the credit agreement, the notes, a security agreement, and any guaranties of subsidiaries—are governed by the laws of another jurisdiction (typically, New York), but the Mortgage will be governed in whole or in part by the laws of the Local Opinion Jurisdiction. The entity owning the real property to be encumbered by the Mortgage may or may not be organized under the laws of the Local Opinion Jurisdiction.
• An issuance of debt securities in the form of notes or bonds, either in a private placement that is exempt from registration under federal securities laws pursuant to Securities and Exchange Commission (SEC) Rule 144A, or in a registered securities offering, to provide funding for operations of a company, to finance the acquisition of a company, to provide capital for other investments, to refinance existing debt and/or for other purposes not specifically related to any real property owned by the company, and which is
secured by all assets of the company and its subsidiaries including real property. The securities are usually issued pursuant to an indenture between the company and a trustee. The core financing documents—the indenture, the notes or bonds, guaranties of subsidiaries, security agreement, etc.—are governed by the laws of another state (typically New York), but the Mortgage or Mortgages encumbering the real property located in the Local Opinion Jurisdiction will be governed in whole or in part by the laws of the Local Opinion Jurisdiction. The entity owning the real property to be encumbered by the Mortgage may or may not be organized under the laws of the Local Opinion Jurisdiction.
• One or more loans secured by real property located outside of the Local Opinion Jurisdiction, but with a Borrower that is organized under the laws of the Local Opinion Jurisdiction. In this situation, local counsel is not rendering opinions relating to real estate, but other opinions pertaining to an entity discussed in the 2012 Report.
There are many variations on these themes. In a number of these situations, opinion requests are generated by corporate finance lawyers, rating agency expectations, securities issuers, and underwriters without appreciation for the customary practice in real estate finance opinions. Despite the adaptability of the content of much of this Supplement to these variables, this Supplement does not attempt to address specifically either transactions that are customarily corporate financings in which real estate collateral is incidental, or opinion letter content for them, which may be expressed in different terms and provide narrower opinions than discussed in this Supplement.
The opinion giver, whether lead or local counsel, may be presented with a list of subjects the recipient would like the opinion giver to address in an opinion letter or with a form of opinion letter, often with a comprehensive set of opinion statements that the recipient would like to receive, and often with few or no assumptions or limitations. Although opinion requests in many instances reflect legitimate interests of a recipient, not all requests are germane to the role of local counsel or appropriate for a local counsel’s opinion, or for the type of transaction the opinions are to address.
The degree of knowledge by local counsel of the Borrower and the amount of information provided to local counsel may vary dramatically from one transaction to another. When opining about a lien or security interest, local counsel may be provided only with a single Mortgage, or it
may be provided with numerous loan documents and Uniform Commercial Code (U.C.C.) financing statements, some of which have no, or only tangential relevance, to the local counsel opinions, while others are appropriately addressed by the local counsel opinion letter. When opining about a party, local counsel may not know the Borrower or its principals, may have had no prior experience representing them, and may not have any direct communications with the Borrower during the pendency of the transaction; instead, the local counsel may communicate only through lead counsel. In other instances, local counsel may have extensive knowledge about, and communications with, the Borrower. The appropriate scope of the opinions and the appropriate content of the opinion letter are shaped by all of the circumstances. In this Supplement, the effect of variables such as these will be recognized in the discussion, but local counsel is advised to consider in each engagement exactly what the scope of its opinions and diligence should be, based on actual circumstances.
The specific purpose for which the opinion letter is being given is mentioned frequently in this Supplement because formulation of the local counsel’s opinion letter will be directed by that purpose. For example, an opinion letter dealing only with the enforceability of a Mortgage affecting property in the Local Opinion Jurisdiction executed by a party not organized under the law of that jurisdiction would not also need to include opinions about entity status, power, authority, authorization, execution, and delivery, but it would assume those matters. An opinion letter dealing only with a party in the Local Opinion Jurisdiction executing a Mortgage encumbering real estate located in another jurisdiction, however, would not need to address enforceability or recordability of the Mortgage, but would address subjects such as entity status, power, authority, authorization, and in some cases, execution and delivery.
Local counsel should prepare an opinion letter that addresses the matters that are appropriate in the circumstances under customary practice.22 If this response is considered inadequate by the recipient,
22 See id. at 220–21, 223–25; see infra Part I.C (explaining what is regarded as
customary practice). Customary practice may vary from state to state, and within the profession. Although the 2012 Report and this Supplement may assist in identifying potentially agreeable, nationally applicable standards, which may thereby bridge the particularities among local and state practices in multistate transactions, the fact that certain opinions or opinion subjects are discussed in the 2012 Report and this Supplement does not prescribe a single solution for, or content of, an opinion letter.
further content should be discussed and agreed upon, again within the bounds of customary practice, respecting the legitimate interests of the parties, including cost effectiveness and the necessity of the opinions and assumptions and limitations under consideration. Some subjects of the request may be answered more appropriately and customarily by service providers other than local counsel or by reliance on commonly accepted alternatives. Examples of such subjects are ownership of collateral (provided by title insurance), litigation (provided by search services, unless the request is limited to matters in which the opinion giver is representing the client), and U.C.C., tax lien, or similar searches (provided by search services).23
This Supplement provides example opinions, assumptions, and limitations that under appropriate circumstances may be included in local counsel opinion letters. Because of the range of issues about which some recipients may seek assurances, the opinion request may ask for subject matter to be addressed that is not within the scope of this Supplement. This Supplement may be helpful in providing indirect guidance in such cases. Alternatively, the opinion request may ask for an opinion on a subject treated in this Supplement in a different formulation or with a different scope. There may be no uniformity in opinion requests, but the subject matter is generally and commonly known. Thoughtful review and consideration of a request for a local counsel opinion letter is essential; and, within the bounds of customary practice and sound legal judgment, a response should be provided promptly to allow time for the gaps between the request and the response to be considered by the opinion recipient.
Assembling a local counsel opinion letter is a menu process. Examples of local counsel opinion statements and the commentary in this Supplement provide guidance in this process. In this Supplement, assumptions, opinion statements, and limitations are discussed in the text as they relate to the purpose of the opinion letter and the circumstances of the local counsel providing the opinions. For purposes of context, however, modifications of the 2012 Illustrative Language contained in Chapter Three of the 2012 Report have been made, incorporating specific assumptions, opinions, and limitations that are discussed in the text of this Supplement. A complete Illustrative Opinion Letter, incorporating the text of the 2012 Illustrative Language and the
23 For a discussion of reliance on public authority documents and on representations
of the Borrower, see 2012 Report, supra note 1, at 227–32.
modifications derived from this Supplement, is provided as an Addendum to this Supplement. It is referred to in this Supplement as the Illustrative Opinion Letter. The 2012 Report in Chapter One Part VII ILLUSTRATIVE LANGUAGE OF AN OPINION LETTER, at 223, provides extensive discussion about the purpose of such a demonstrative presentation that is equally applicable to this Supplement’s Addendum. To underscore, the purpose of the Illustrative Opinion Letter is to present sample language of assumptions, opinions, and limitations compiled in the usual order of an opinion letter. It is not intended to create a prescriptive form or dictate content.
PROFESSIONAL RESPONSIBILITY
Many professional responsibility considerations apply to opinion letter practice—legal ethics are a starting point, but the entirety of the law governing lawyers is relevant. Two subjects deserve mention here.
First, the typical opinion letter declares that it is provided “as counsel to the Borrower.”24 This indicates the existence of a lawyer-client relationship. When the Borrower engages lead counsel to provide services in connection with the loan, that client relationship is reasonably clear. When local counsel is engaged to provide an opinion letter, the relationship may be remote—the engagement may come through lead counsel as the client’s agent or representative, and local counsel may have no contact with the Borrower. In some cases, local counsel may be asked by the opinion recipient to provide an opinion about a local document or entity status as if on behalf of the Borrower. Regardless of how local counsel for a Borrower is brought into a matter to provide an opinion letter, local counsel should consider the Borrower as a client unless the transaction parties agree otherwise and observe the rules applicable to the representation of a client.25 The formalities of establishing that relationship cannot be overlooked even in the face of a request for an opinion letter to be delivered in a very short time.26
24 See id. at 261. 25 See Real Estate Opinion Guidelines, supra note 15, at 243 (suggesting that the
practical problem of forming a lawyer-client relationship with a party with whom local counsel has had little or no previous contact may suggest that the local counsel should serve as counsel to the lender in providing an opinion letter).
26 In some jurisdictions, a written fee agreement is required. In most instances, an engagement process should be followed that is consistent with the requirements of the Local Opinion Jurisdiction and of local counsel’s law firm.
The duties of professional responsibility flow from the lawyer-client relationship, including ethical obligations to a client. Among them is the need to clarify (limit) the scope of the representation to the essential work required to provide the opinion letter appropriate to the circumstances of the engagement. This clarity will also define the degree of diligence required in the representation. Local counsel are asked sometimes by the opinion recipient to provide information on formatting and recording requirements, and even on content requirements needed to satisfy applicable law. This Supplement refers to possible responses to some such inquiries. A client’s request to provide an opinion might or might not authorize the lawyer to provide substantive drafting suggestions to the recipient, even those necessary to render an opinion letter satisfactory to the recipient. While such permission could be implicit in the engagement, the lawyer should consider whether it is necessary in the circumstances to confirm with the client or lead counsel whether responding to the recipient’s requests is authorized, observing the need to explain the request and the result of responding to it as required in the applicable rule of professional conduct.27
Second, the standard of care expected of a lawyer is generally determined by practice standards of a lawyer in that jurisdiction. Comment b to § 52 of the RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS, notes that the “professional community whose practices and standards are relevant in applying this duty of competence is ordinarily that of lawyers undertaking similar matters in the relevant jurisdiction.”28 In many formulations, this means the jurisdiction in which the lawyer is admitted to practice. It is possible, however, that providing an opinion about the law of another jurisdiction could impose duties of the profession of that jurisdiction, as well as implicate the rules pertaining to unauthorized practice of law and multijurisdictional
27 The applicable rule of professional conduct governing the local counsel opinion
letter would typically be that of the Local Opinion Jurisdiction. The lawyer should consider the choice of law rules of the jurisdiction where the lawyer is licensed pertaining to professional conduct provided in a rule based on ABA Model Rule of Professional Conduct 8.5(b)(2). See MODEL RULES OF PROF’L CONDUCT r.8.5(b)(2) (AM. BAR ASS’N 2015).
28 The RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 52 cmt. b (AM. LAW INST. 2000). The RESTATEMENT comment also suggests that national standards may be recognized when there is a national practice. Id. Although the 2012 Report and this Supplement promote common understanding, they do not establish a national practice as contemplated by the RESTATEMENT.
practice.29 There can be no better justification for a local counsel’s opinion letter.
I. INTRODUCTION AND BACKGROUND OF THE OPINION LETTER
A. Introductory Matters. This subject is discussed at the start of Chapter Two of the 2012 Report.30
0.3 Addressee. Nationally recognized statistical rating organizations (known as rating agencies) should not be named as addressees. See also this Supplement, Part V, Paragraph 5.1.31 It is not common practice to name recipient’s counsel as an addressee for the reason that recipient’s counsel should have no need to rely on the opinion expressed but rather should form independent judgment about the legal matters addressed.
B. Background of the Opinion Letter. This subject is discussed in Chapter Two Part I of the 2012 Report.32
1.0 Role of Opinion Giver as Local Counsel. A common expression describing the role of local counsel would be:
We have acted as counsel to [name of party], as “[Mortgagor,] [Borrower,][Guarantor][etc.]” in the State of [Local Opinion Jurisdiction] (the “State”) for the purpose33 of providing this Opinion Letter in connection with the Loan.
1.1 List and Definition of Transaction Documents;34 Defined Terms.
(a) Paragraph 1.1 of the 2012 Illustrative Language contains a list of documents commonly used in real estate secured transactions, collectively defined as “Transaction Documents,” that lead counsel has acted as counsel in preparing or negotiating.35 As local counsel would not ordinarily prepare, but would ordinarily review or consider in
29 See applicable rules in the jurisdiction based on ABA Model Rule of Professional Conduct 5.5. See MODEL RULES OF PROF’L CONDUCT r.5.5 (AM. BAR ASS’N 2015).
30 See 2012 Report, supra note 1, at 227. 31 See infra Part V.5.1. 32 See 2012 Report, supra note 1, at 227. 33 Some local counsel prefer to insert the word “solely” in describing the purpose of
the engagement. The described limitation of scope is sufficient, regardless. 34 See 2012 Report, supra note 1, at 228. 35 See id. at 261.
providing its opinions only some of the transaction documents, the local counsel opinion letter would typically present the list of documents in a manner such as:
In preparing this Opinion Letter, we have [been furnished with] [reviewed] unexecuted copies of the following documents relating to the Transaction:
In most transactions for which a local counsel opinion letter is required, some of the Transaction Documents listed will not be governed by the law of the Local Opinion Jurisdiction. Those documents that are not the subject of opinions in the opinion letter should be excluded when listing and defining Transaction Documents about which an opinion is provided. This is discussed in subparagraph (b) below. In addition, the enforceability of such excluded documents should be assumed, as discussed in this Supplement Part II Paragraph (1)(i). Such an assumption may be implicit but it is best stated in the opinion letter.
The source and status of these documents is relevant to local counsel. Some opinion givers prefer to state that the documents have been furnished by an identified source (usually the Borrower’s lead counsel or recipient’s counsel or recipient itself) when providing the opinion letter, but this is not necessary. It is the responsibility of the recipient to provide the documents for review, often to local counsel through lead counsel for the Borrower. If the local counsel opinion giver has commented on issues in the documents that prevent its providing opinions as requested, it would need to review revised documents that include the changes enabling issuance of the opinion letter or explicitly assume that the required changes have been made before providing the opinions as requested.
Some opinion requests ask that the opinion letter refer to documents reviewed “as executed.” Assumption (e) in the Illustrative Opinion Letter allows the opinion giver to assume that the documents examined are the same as those executed and delivered. Unless the local counsel has supervised or verified the execution of transaction documents, the expectation that local counsel is to review executed documents for its opinion is unnecessary, burdensome, and not cost effective.
(b) The extent to which Transaction Documents apply to the opinions to be provided determines the extent to which local counsel
needs to review them.36 For example, terms of the Note or a Loan Agreement, governed by law of another jurisdiction, may be incorporated in a Mortgage that will be opined about as to enforceability under the law of the Local Opinion Jurisdiction. These documents will need to be reviewed, or their enforceability expressly assumed, if their terms are necessary to support express opinions being given.37 Because these documents are not themselves opined about, the local counsel opinion giver should consider limiting the effect of review by omitting them from the list of Transaction Documents about which opinions are rendered, and by providing a separate paragraph about them such as the following example:
We have been furnished with a Loan Agreement for execution by Borrower and Lender (the “Loan Agreement”) and a Promissory Note for execution by Borrower in favor of Lender (the “Note”). We have not reviewed the Loan Agreement, the Note, or (except for the Mortgage) any other documents identified therein (collectively, the “Other Transaction Documents”) except to the extent the Other Transaction Documents contain specific definitions that are expressly incorporated in the [Mortgage] [Opinion Transaction Documents] and are necessary to our opinions. Our opinions are given (a) assuming that nothing in any of such Other Transaction Documents materially changes any of the terms of the [Mortgage] [Opinion Transaction Documents (referring to those Transaction Documents about which an opinion is being provided and defined as such in the Opinion Letter)], (b) assuming that such Other Transaction Documents will be enforced consistently with the opinions expressed in this Opinion Letter, (c) assuming that definitions incorporated in the [Mortgage] [Opinion Transaction Documents] will be construed in accordance with the Law of the State if applicable, and (d) without regard to the effect of incorporation, by reference or otherwise.
If the scope of the opinion letter is limited to authority or execution of Transaction Documents and does not opine as to enforceability, such a limitation is unnecessary. When documents have no application to the
36 The scope of review by counsel is discussed in Chapter Two Paragraph 1.4 of the
2012 Report. See 2012 Report, supra note 1, at 231. 37 See id. at 232.
opinions being provided, the opinion letter should state that those documents are excluded from review.
As noted in subparagraph (c) below, the opinion giver should determine that incorporated definitions are used in a manner consistent with the law of the Local Opinion Jurisdiction or take such differences into account.
Local counsel are sometimes asked to render an enforceability opinion about identified documents that on their face state that they are governed by the law of a jurisdiction other than the Local Opinion Jurisdiction “as if” the Local Opinion Jurisdiction law governed the documents. In such a case, the local counsel would need to review all of the identified documents rather than only those that are governed by the Local Opinion Jurisdiction or that affect opinions concerning them. This opinion and the reason that it may be requested are discussed in Part III Paragraph 3.5(b), of this Supplement. If it is intended that an opinion cover usury as if the law of the Local Opinion Jurisdiction applied although the evidence of indebtedness is governed by the law of another jurisdiction, the words “and rendering the opinion expressed in opinion Paragraph __ [usury]” would be added to the purpose statement in the example above. Implicit and express usury opinions are discussed in Part III Paragraphs 3.5(c) and 3.10 of this Supplement.
(c) At some place early in the opinion letter, a reference to defined terms used in the opinion letter may be made. Often, definitions in a transaction document are incorporated in the opinion letter. An example is:
Terms used in this Opinion Letter with initial capital letters and not otherwise defined in this Opinion Letter shall have the meanings ascribed to them in the Mortgage.38
Note that this example refers to an external source of terms used as defined terms in the opinion letter. Local counsel should have access to any document that creates incorporated definitions. The Illustrative Opinion Letter Paragraph 1.1 defines certain terms, including “Real Property.”
Adopting definitions in transaction documents should not be considered simply a matter of convenience, as certain definitions may
38 See supra note 16. The reference, “defined in this Opinion Letter,” relates to the
definition provided in Paragraph 1.1 of the Illustrative Opinion Letter that contains the definition of the Mortgage. See Illustrative Opinion Letter, infra para. 1.1.
differ from those legally recognized in the Local Opinion Jurisdiction. For example, if the Mortgage includes in its definition of “real property” certain property that under the applicable Local Opinion Jurisdiction law is not treated as real property, an opinion letter adopting the document definition of real property may provide inadvertently an opinion contrary to law. The opinion giver should be careful to use the term in a manner that is consistent with applicable law. An alternative, limiting the definition to that recognized in the Local Opinion Jurisdiction, is provided in Part III Paragraph 3.6(a) of this Supplement.
1.2 Authority Documents.
This subject is discussed in Chapter Two Paragraph 1.2 of the 2012 Report at 229.
If the Borrower is an entity organized under the law of the Local Opinion Jurisdiction, the local counsel opinion giver may be asked to render opinions as to entity existence, status, power, authorization, and, when appropriate,39 execution and delivery of transaction documents with respect to such domestic entity or entities.
If the Borrower is an entity that is not organized under the law of the Local Opinion Jurisdiction, the local counsel opinion giver will need to assume those matters relating to entity existence, status, power, authorization, and, if appropriate, execution and delivery of transaction documents. If the Borrower is an entity that is not organized under the law of the Local Opinion Jurisdiction, the local counsel is often asked to opine that the Borrower is qualified to transact business in the Local Opinion Jurisdiction. To support such an opinion, local counsel should obtain and rely on a status certificate from the appropriate public official of the Local Opinion Jurisdiction so stating.
These same concepts are applicable to any direct or indirect constituent members of the Borrower, the status of which is necessary for the opinion letter.
1.3 Opinion Jurisdiction; Definition of Law Applicable.
The trend noted there to exclude coverage of federal law is even more pertinent to local counsel opinion letters. Lead counsel or special counsel would deal more appropriately with federal law issues
39 See infra Part III.3.4.
concerning an obligor party that are relevant in the transaction. It is nevertheless usual, albeit unnecessary, to recite a limitation as to federal creditors’ rights laws, as in Illustrative Opinion Letter Paragraph 4.2.
1.4 Scope of Review.
The 2012 Report discusses limiting the scope of inquiry to specific documents, which local counsel often would.40 As noted there, a specific limitation is needed for this purpose.41 An example is provided in Illustrative Opinion Letter Paragraph 1.4.
1.5 Reliance on Other Sources Without Investigation.
II. ASSUMPTIONS This subject is discussed in Chapter Two Paragraph 2.1 of the 2012
Report at 223–37. Assumptions relate to factual matters, including those based on legal conclusions, such as the legal status of a party, that are not the subject of the opinions given, but which may be necessary predicates for one or more opinions.
Not all of the assumptions listed in the Illustrative Opinion Letter would apply to all opinion letters; and not all assumptions that will underlie all opinions are listed.42 Opinion letters often include customary assumptions that do not pertain to the opinions expressed.43 Recipients sometimes request that assumptions not relevant to opinions being provided be deleted, and the request can often be accommodated. The 2012 Illustrative Language lists assumptions generally recognized in real estate finance opinion letters of lead counsel. Additional assumptions and certain modifications of the listed assumptions that relate to local counsel opinions particularly are discussed in this Supplement and shown in the Illustrative Opinion Letter. Because the organization of an opinion letter usually places assumptions in a separate section, they will be so
40 See 2012 Report, supra note 1, at 231–32. 41 See id. 42 See id. at 234. 43 See id. at 233–34.
presented in this Supplement, but assumptions discussed in this Part II will be referenced to the opinions in Part III to which they relate.
(1) The intent of Assumption (c) of the 2012 Illustrative Language44 is two-fold. It first assumes that those parties identified have legal existence (that is, each is organized as the entity described); that the transaction documents have been duly authorized by all necessary corporate or other governance action of the party; that the transaction documents have been duly executed and delivered; and that persons acting on behalf of those parties were duly authorized to act in that capacity. Secondly, it also assumes that the transaction documents are valid as to, binding upon, and enforceable against all the parties included in the assumption. Assumption (c) of the 2012 Report assumes that the opinion giver will opine about the Borrower (and a Guarantor) as an entity and about enforceability of documents, as that assumption excludes the Borrower (and a Guarantor) from its scope.45
Modifications of the dual functions of Assumption (c) may be required for local counsel opinion letters:
(i) When the opinion giver is not opining about the Borrower itself, as will sometimes be the case in a local counsel opinion letter, the assumption should not state language excluding the Borrower. In Assumption (c), the phrase “(other than the Borrower)” either would be deleted or would be modified by substituting for the words “other than” the word “including.” In these situations, local counsel will assume that the Borrower also satisfies the requirements listed in the first clause of the sentence.46 Deleting or modifying the phrase “(other than the
44 Id. at 264:
(c) Each party to the Transaction (other than the Borrower and the Guarantor) has satisfied those legal requirements that are applicable to it to the extent necessary to make the Transaction Documents enforceable against it, and each such party’s obligations set forth therein are enforceable against it in accordance with all stated terms.
45 See id. at 263–64. 46 A possibly clearer approach to modifying Assumption (c) of the 2012 Report,
more explicitly relating to the Borrower, might appear as follows: We have assumed that the Borrower (a) if organized or formed under the laws of a jurisdiction other than the Local Opinion Jurisdiction is a [nature of entity] duly organized or formed, validly existing and in good standing under the law of the jurisdiction of its organization or formation; (b) has the power under its organizational documents and applicable [nature of entity] law to execute, deliver, and perform its obligations under the Transaction
Borrower)” in Assumption (c) —broadening the assumption—would result in assuming also that the transaction documents are enforceable against the Borrower. If an enforceability opinion relating to transaction documents entered into by the Borrower is to be given, however, the revision to this Assumption described in subparagraph (ii) following should be made.
(ii) If a purpose of the local counsel opinion letter is to provide an opinion as to enforceability of certain transaction documents against the Borrower but not an opinion about the Borrower itself, as is often the case, the breadth of the assumption resulting from deletion or modification of the phrase (“other than the Borrower”) should be limited. Otherwise, the value of the enforceability opinion would be negated, as the assumption would assume away the enforceability opinion. An example of such a limitation is the addition of a phrase such as “except as is expressly provided as to the Borrower in this opinion letter” preceding the second part of Assumption (c) of the 2012 Report.47 Addition of this phrase allows omission or modification of the phrase “(other than the Borrower)” in Assumption (c), thereby enlarging the assumption as to all underlying legal requirements to enforceability to the Borrower, without thereby disclaiming an enforceability opinion as to the Borrower. The enforceability opinion can be given otherwise based on assumptions as to the Borrower’s existence, status, power, authorization, execution and delivery. Therefore, if the opinion giver removes or modifies the first phrase of Assumption (c), the opinion giver should add the phrase appearing in boldface above in this paragraph when providing an enforceability opinion.48
Documents to which it is a party; (c) has taken all action necessary under its organizational documents and applicable [nature of entity] law to authorize the execution and delivery of the Transaction Documents to which it is a party and the performance of its obligations thereunder; and (d) has duly executed and delivered the Transaction Documents to which it is a party.
This does not substitute for Assumption (c) of the 2012 Report, which is needed to state the assumption as to all parties other than the Borrower, but it more clearly explains the effect of deleting the parenthetical “(other than the Borrower)” or substituting the word “including” for “other than.”
47 See 2012 Report, supra note 1, at 240–42. 48 The bolded, additional phrase can be added to Assumption (c) of the 2012 Report,
as a matter of form in every case as it is self-operative, meaning that the content of the opinion controls what is assumed. Its omission may be preferred so as not to suggest that such an opinion may be provided.
The limiting phrase provided in the example above should be considered in conjunction with two common situations. First, if there are documents in the transaction that are not addressed by the enforceability opinion given, such as those reviewed but not opined about, the sample language is intended to preserve the assumption about enforceability of those documents even as to the Borrower if the phrase “(other than the Borrower)” is deleted or modified. Second, if a choice of law opinion is not given expressly but an enforceability opinion is given, the sample limitation may not be sufficient to disclaim a choice of law opinion if it is inferred from an enforceability opinion. As noted in the 2012 Report49 and in this Supplement Part III Paragraphs 3.5(b) and 3.9, enforceability of choice of law provisions should be addressed specifically by separate assumptions or exclusions. An example of an additional assumption for this purpose is:
To the extent governed by the Law of any jurisdiction other than the State, including conflicts of law principles thereof, we have assumed that the Transaction Documents are enforceable against the parties thereto in accordance with their respective terms.
Certain other assumptions or modifications of assumptions presented in the 2012 Report are discussed in Part III of this Supplement as they relate to opinion texts. Some deserve specific mention, as they are more often applicable to local counsel opinion letters than to lead counsel opinion letters.
(2) Unless local counsel is supervising or can verify the execution and delivery of the Borrower’s transaction documents,50 which is not usual practice, an assumption about execution and delivery is appropriate. Although modification of Assumption (c) as discussed in Paragraph (1) above will subsume an assumption that the Borrower has duly executed and delivered transaction documents, a more specific assumption to this effect would read:
The Transaction Documents have been duly executed and delivered by the respective parties thereto by their duly authorized officers or other representatives in accordance with the laws of the jurisdiction where executed and with the laws of any jurisdiction governing actions of the parties executing and delivering such documents.
49 See 2012 Report, supra note 1, at 245–48. 50 See infra Part III.3.4.
(3) When the subject of acknowledgment is relevant to validity of a transaction document or to the recording of the document in the Local Opinion Jurisdiction,51 additional assumptions may be appropriate. By way of example, when the Local Opinion Jurisdiction accepts instruments acknowledged in accordance with the law of another jurisdiction where executed, the foregoing assumption would be expanded by adding:
. . . and the form of acknowledgment and action taken with respect to acknowledgment each complies with requirements of the jurisdiction where acknowledged.
Such an assumption can be added independently, as shown in the Illustrative Opinion Letter.
(4) If a choice of law opinion is given,52 an assumption such as that provided in the 2012 Report at 248, where state law is based on Restatement principles, should be added. Assumptions consistent with other Local Opinion Jurisdiction law on conflicts of law should be adapted as appropriate.
(5) To avoid any possible implicit opinion that all upper tiers of ownership or control of the Borrower have acted to authorize the Borrower to enter into and perform the transaction documents, as discussed the 2012 Report at 239, an assumption may be added, as follows:
Each of the persons whose consent is required to authorize the Borrower to execute and deliver the Transaction Documents and perform its agreements thereunder, (i) if an entity, is validly existing and in good standing under the law of the jurisdiction of its formation; and (ii) has taken all action necessary or received all necessary authorizations under any applicable organizational documents and applicable law to authorize the execution and delivery of the Transaction Documents to which the Borrower is a party and the performance of the Borrower’s obligations thereunder.
This subject is discussed further in this Supplement Part III Paragraph 3.3.
51 See infra Part III.3.6(b). 52 See infra Part III.3.5(b) and 3.9 (noting that a choice of law opinion may be
inferred from an enforceability opinion).
(6) In addition to Assumptions (b) and (h) of the Illustrative Opinion Letter, opinions provided with respect to U.C.C. filings, including an opinion that the Mortgage or a U.C.C. financing statement is in form sufficient to perfect a security interest in fixtures, should be based on an assumption that the correct legal name of the debtor is stated in all relevant places when local counsel is not otherwise engaged to determine this fact. For example:
The Mortgage and the U.C.C. financing statement sufficiently provide the name of the Borrower as debtor.53
(7) Local law and specific opinion statements not considered in the 2012 Report or this Supplement may require or merit assumptions in addition to those discussed in the 2012 Report54 or this Supplement.
III. OPINIONS This subject is discussed in Chapter Two Part III of the 2012 Report
at 237–50. This Part III provides a discussion about the opinions that a local
counsel may be asked to give in a real estate secured loan, with elaboration on how local counsel may need to adapt the language of comparable opinions that a lead counsel would be asked to give. This Part III refers to certain assumptions and limitations that are appropriate to support opinions by local counsel that differ from or add to the assumptions and limitations that are discussed in the 2012 Report. Inclusion of opinions or opinion topics in this Supplement does not establish that the request for or the giving of such an opinion is either customary practice or in some cases appropriate. The purpose of including the opinion topics that follow is that many of them appear in requests to local counsel, and it is the intention of this Supplement to provide some guidance in response when requests are appropriate. The Paragraph numbering used in this Supplement Part III corresponds to Paragraphs in both Chapter Two and Chapter Three of the 2012 Report.
Five opinions, discussed in Paragraphs 3.1 through 3.5 in this Part III, pertain to the formation and existence of an enforceable contract and are sometimes referred to as “core” opinions.55 The subject matter of all these opinions would be appropriately addressed by counsel for the
53 See U.C.C. §§ 9-502(a), 9-503 (revised 2000), 3 U.L.A. 143, 149 (2016). 54 See 2012 Report, supra note 1, at 264–65. 55 See id. at 242.
Borrower. When one opinion giver provides a single opinion letter, all five of these core opinions may (but will not necessarily) be provided in one opinion letter. When local counsel is involved, however, it would be more common that only some of the opinions are provided by local counsel, while the underlying legal and factual bases of others are assumed or otherwise relied upon.
The first four opinions, 3.1 through 3.4, relate to the Borrower as an actor in forming the contract. The substance of these opinions is prerequisite for an enforceability opinion, so the bases for them either should be determined or be assumed expressly or implicitly. Three of these opinions—status, power, and authority—are given only as to entities, not as to natural persons. Except as noted below, the issues related to these opinions in connection with a local counsel opinion letter are generally no different than the issues described in the 2012 Report56 in relation to such opinions when rendered by lead counsel. The differences, discussed in this Supplement, lie in which of these opinions are to be given by local counsel, and the bases for giving them. Assumptions may be provided as substitutes for these opinions when appropriate.
3.1 Status – Existence and Good Standing.
The formulation of an opinion about the status of the Borrower varies depending on whether or not the Borrower is an entity organized under the law of the Local Opinion Jurisdiction. The 2012 Report discusses this opinion in the context of a Borrower organized under the law of the Local Opinion Jurisdiction.
(a) The 2012 Illustrative Language Paragraph 3.157 includes several opinion formats. The first sentence is a statement indicating that the opinion giver has performed the legal due diligence necessary to form its opinion as to the Borrower’s existence as a certain legal entity in the Local Opinion Jurisdiction. When counsel has formed the entity or otherwise has adequate information, such an opinion may be appropriate. The requisite diligence for this opinion when it is not based on a public authority document will vary from state to state. However, in most circumstances, local counsel will not be giving this opinion based on its
56 See id. at 237–39. 57 See id. at 266.
due diligence but in reliance on a public authority document, stating this opinion in language such as:
Based solely on the Public Authority Documents, the Borrower is a [nature of entity], validly existing [and in good standing] in the State.
The wording of the public authority document and the statutory basis for good standing (or qualification) in a given state will affect the scope and exact wording of this opinion. If the opinion is based solely on the public authority document, as in the example, the opinion should opine only to what the public authority document recites. A single public authority document may or may not include both assurances.
When the Borrower is an entity organized in the Local Opinion Jurisdiction, the opinion concerning existence and standing makes unnecessary a separate opinion that the Borrower is qualified to do business in the Local Opinion Jurisdiction.
(b) When the Borrower is not organized in the Local Opinion Jurisdiction, local counsel may be asked to opine that the Borrower is qualified to do business in that jurisdiction, or that it is not required to be so qualified to perform the transaction documents.
The opinion that the Borrower is qualified to conduct business in the Local Opinion Jurisdiction is based ordinarily on a public authority document. The opinion may include assurance that the Borrower is in good standing if the concept of “good standing” is recognized under the law of the Local Opinion Jurisdiction. As noted above, the assurance provided by the public authority document should be considered. A single public authority certificate may but may not include both assurances.
The opinion may be stated as follows:
Based solely on the Public Authority Documents, the Borrower is [qualified][registered] to do business [and is in good standing] in the State [as a foreign {nature of entity}].
(c) An opinion to the effect that the Borrower is not required to be qualified in the State in order to perform the Transaction Documents requires legal analysis that would exceed the scope of customary practice. Many consider such an opinion request to be unusual or inappropriate. Providing such an opinion would require consideration of the conduct of the Borrower that is permitted or required under the transaction documents in light of requirements of law of the Local
Opinion Jurisdiction.58 Doing so would require specific discussion between the opinion giver and the recipient, and consideration of issues of cost-benefit of the opinion measured against the cost of qualifying or the risk of not qualifying.
3.2 Power.
Local counsel opinion letters that cover a party organized as an entity under the law of the Local Opinion Jurisdiction often include opinions as to the corporate (or other entity) power of the Borrower to enter into the transaction or to execute and deliver the transaction documents. An opinion of local counsel regarding the power of the Borrower would be given only when the Borrower is organized under the laws of the Local Opinion Jurisdiction. When the Borrower is an entity not organized under the law of the Local Opinion Jurisdiction and an enforceability opinion is to be given, the Borrower’s power is to be assumed. See Assumption (c) of the 2012 Report and discussion in this Supplement Part II Paragraph (1).
A lender may ask for an addition to this opinion that the Borrower has the power “to perform” its obligations under the transaction documents. After reviewing the organizational documents of the entity, and provided the conclusion is supported thereby, an opinion giver should be able to render such an opinion because this opinion covers only the power of the entity under its organizational and other governance documents and applicable entity law, and not the laws that may govern performance by the Borrower of the transaction documents.59 In other words, the scope of this opinion is limited to the
58 Note that this opinion pertains to the Borrower. It does not address whether a
managing member or general partner of the Borrower must qualify, which may be a requirement for certain activities in some jurisdictions. A request concerning this possible requirement may be appropriate in some circumstances. See also infra Part III.3.16 (regarding an opinion that pertains to regulation of the non-domestic recipient in the Local Opinion Jurisdiction).
59 This power-to-perform opinion is limited to the legal capacity of the party to enter into and perform its contracts, and should not be construed as applying to the lawfulness of the obligations to be performed or that any particular obligation in a transaction document is lawful or can be performed without further approvals or actions. This interpretation is discussed with analysis in DONALD W. GLAZER & SCOTT FITZGIBBON, LEGAL OPINIONS (3d ed. 2008), at 240–44. See infra Part III.3.17 for discussion of a
legal capacity of the Borrower to form and perform its contract, and not that any particular obligation in such a contract is lawful or can be performed unconditionally.
As is noted in more detail in Paragraph 3.3 (Authorization), below, exercise of the entity power of the Borrower to enter into and perform the transaction documents may be subject to consents or approvals of others, such as upper tier entities or managers.
3.3 Authorization.
Local counsel opinion letters that cover a party organized as an entity under the law of the Local Opinion Jurisdiction often include an opinion that the necessary corporate (or other entity) actions and approvals have been taken or obtained.60 The authorization opinion does not apply to third-party or governmental approvals, but only to internal company or other entity approvals regarding a Borrower. When the Borrower is not an entity organized under the law of the Local Opinion Jurisdiction, the matter of authorization is assumed.61
The 2012 Report62 advises that where there are tiers of ownership or control between the Borrower entity and its members, partners, shareholders, or other owners, an opinion giver should expressly state if counsel has reviewed and verified any necessary consents throughout the tiers of ownership or only those at specified levels of the organizational hierarchy. Unless the opinion is expressly limited, the opinion giver would need to review what is necessary to render the authorization opinion. Alternatively, the opinion giver should assume that such consents have been given.63
Local counsel often will not have sufficient information to opine, implicitly or explicitly, through upper tiers, and in many cases, upper tier entities are not organized under the law of the Local Opinion Jurisdiction. If providing the opinion that upstream authorizations have been given, the opinion giver would need to rely on certificates of the constituents, or form an opinion based on review of the authority request for an express opinion on performance of the Transaction Documents as not prohibited by law.
60 See 2012 Report, supra note 1, at 266. 61 See id. at 234; see also supra Part II.(1). 62 See 2012 Report, supra note 1, at 237. 63 See supra Part II.(5).
documents and applicable law alone, but this endeavor is beyond the scope of the typical local counsel’s diligence. Unless it is local counsel’s intent to opine after such diligence, it should preclude such an implicit opinion. Although there is support for implicit limitation of such an opinion,64 an express assumption, such as that provided in this Supplement, Part II Paragraph (5), would contravene such an implicit opinion.
3.4 Execution and Delivery.
This subject is discussed in Chapter Two Paragraph 3.4 of the 2012 Report at 240.65
The execution and delivery opinion focuses on certain steps a party must take to bind itself to the contract. Although usually combined into one opinion statement,66 there are two distinct aspects of it—execution and delivery. Whether local counsel is the appropriate opinion giver for either depends on a number of circumstances.
An opinion on execution means only that a person purporting to be the person authorized to execute on behalf of the party has executed the identified transaction documents.67 It does not address enforceability of the contract or recordability requirements (for example, color of ink), although it may cover the laws on sufficiency of signatures (for example, an X or an electronic signature). When the law of the Local Opinion Jurisdiction governs the Borrower and execution of documents, local counsel in that jurisdiction could provide an opinion on execution in conformity with governing organizational documents and authorizations
64 The TriBar Opinion Committee, in Third-Party Closing Opinions: Limited Liability Companies, 61 BUS. LAW. 679, 689 n.52 (2006) states that:
[T]he opinion preparers may assume, without so stating, that when an approval is given by a member or manager that is not a natural person, the member or manager is the type of entity it purports to be, that it was authorized to approve the transaction, and that those acting on its behalf had the approvals they required. As with any unstated assumption, opinion givers may not rely on this assumption if reliance is unreasonable under the circumstances in which the opinion is given or they know it to be false. [citation omitted] To avoid any misunder- standing, some opinion givers choose to state the assumption expressly.
See infra Part II.(5) for such an assumption. 65 Note: In Paragraph 3.4(a) of the 2012 Report, supra note 1, at 240, the reference
to Paragraph 2.1(e) should read “2.1(d).” 66 See Illustrative Opinion Letter, infra para. 3.4: “The Borrower has duly executed
and delivered the Borrower Transaction Documents.” 67 See 2012 Report, supra note 1, at 240.
just as if it were lead counsel. When the law of the Local Opinion Jurisdiction does not govern execution, it is appropriate to assume execution by the Borrower. If the law of more than one jurisdiction could govern execution, such as, for example, when the Borrower is organized in the Local Opinion Jurisdiction but the execution of documents takes place elsewhere, it would be appropriate to limit the opinion statement as to execution by the preface “to the extent the law of the State is applicable, . . .” This limiting language would be called for even when a choice of law opinion is provided. Alternatively, the opinion giver can decline to address the subject entirely by adding a phrase such as “. . . , as to which no opinion is given.”
When appropriate to render the execution opinion, counsel not present at signing can give the opinion based on a certificate of the Borrower. This would be appropriate for counsel responsible for arranging for execution and delivery of transaction documents in a jurisdiction covered by its opinion letter, but it is pointless for local counsel to have such a responsibility otherwise. Such a certificate would be an additional Authority Document.68 An execution opinion, based on a certificate or a sufficient corporate record, may be provided by a statement such as “when the Transaction Documents have been signed by [person or officer authorized in such certificate or resolution], they will have been duly executed.”
In giving an execution opinion, the opinion giver assumes, either implicitly or expressly, that the signature is genuine.69 It is a commonly held view that a legal opinion as to genuineness of signatures is inappropriate because the assurance is a matter of fact.70
Delivery, generally meaning voluntary transfer of possession or control,71 is usually not a matter for attention of local counsel. What law governs delivery is not always clear: it could be the law that governs the
68 See Illustrative Opinion Letter, infra para. 1.2. Reliance on a certificate made by appropriate officials of the Borrower is permitted as customary practice. See, e.g., ABA Business Law Accord Report, supra note 7.
69 See 2012 Report, supra note 1, at 234. 70 See id. at 235. Requests for assurance about genuineness have been related to the
outcome in Fortress Credit Corp. v. Dechert LLP, 934 N.Y.S.2d 119 (N.Y. App. Div. 2011), discussed in the 2012 Report, note 1, at 222. Local counsel having responsibility for arranging for document execution may be able to provide some assurance, short of an opinion, that certain described customary actions were taken to verify the identity of a signer, including an affidavit or certificate of the signer. A certificate of the actions taken may be provided to document and support the local counsel’s conclusions.
71 See U.C.C. § 1-201(b)(15), 1 U.L.A. 184 (2012).
entity, the law of the place where executed, the law of the place where delivery is to be effected, or the law chosen to govern the transaction document.72 Delivery is most often effected by authorization of the delivering party when certain conditions are met. Unless the act of delivery is in control of local counsel and is governed by the law of the Local Opinion Jurisdiction, it is rarely an appropriate subject for local counsel to opine about.73 Usually, local counsel will assume delivery as well as execution.
3.5 Enforceability.
When local counsel is requested to review transaction documents governed by the law of the Local Opinion Jurisdiction, the opinion letter ordinarily includes an opinion that the specified transaction documents are enforceable against the Borrower.
This opinion subsumes the foregoing formative opinions, 3.1 through 3.4, which if not intended to be opined about are assumed, as noted in this Supplement Part II Paragraph (1). Although an opinion letter providing an enforceability opinion could omit the separate precursor formative opinions, it is customary practice in real estate financing third- party opinion letters to recite them or expressly assume them.
The language of an enforceability opinion could be read as covering a broad range of legal issues and opining about them implicitly. The following subsections review some of these issues, several of which present concerns unique to local counsel primarily for the reason that documents often are governed in whole or in part by the law of a jurisdiction other than the Local Opinion Jurisdiction. The use of the generic enforceability qualification (this Supplement Paragraph 4.3 and corresponding paragraph in the Illustrative Opinion Letter) may serve to exclude an enforceability opinion on most of these subjects to the extent limited by applicable law unless the assurances provided with that qualification indicate otherwise.
72 See M. JOHN STERBA, JR., LEGAL OPINION LETTERS: A COMPREHENSIVE GUIDE TO
OPINION LETTER PRACTICE, 11-81–11-82 (Supp. 2013). 73 A statement such as “the Mortgage will be delivered when transfer of
possession of it to the Lender is authorized by the Borrower” sometimes satisfies a request for an opinion about delivery.
(a) Effect of the Document. An enforceability opinion assures that the transaction documents opined about are sufficient to serve their fundamental contractual purpose.74 This means that an enforceability opinion about a mortgage would indicate that at least as a matter of form the legal elements of a mortgage contract in the Local Opinion Jurisdiction are present. The enforceability opinion should not be read as assuring that a lien is created, but rather that the Mortgage is a contract that can function for that purpose, based on the assumptions expressed or implied and subject to the limitations expressed in the opinion letter. Critical legal foundations for mortgaging are assumed implicitly or explicitly, including that the Borrower has an interest in correctly described property that may be encumbered.75
(b) Choice of Law. Transaction documents that are addressed in an opinion letter may contain provisions choosing the law of a jurisdiction other than the Local Opinion Jurisdiction to govern certain contractual aspects of the documents. Many counsel do not consider choice of law issues unless an express opinion about the effectiveness of choice of law provisions is specifically requested76 and given in addition to the enforceability opinion. The literal language of an enforceability opinion could be read to include implicitly an opinion as to the effectiveness of choice of law provisions in the transaction documents.
(1) Unless only one jurisdiction’s law is intended to govern all of the transaction documents, enforceability of the choice of law provisions in the documents is in question. It is common in a transaction involving local counsel that a Mortgage, which may be governed by local law, secures a debt instrument governed by the law of another jurisdiction. There are many variables, including bifurcated choice of law selecting the law of the Local Opinion Jurisdiction to govern creation of a Mortgage and remedial aspects as to the security property, but selecting the law of another jurisdiction as to covenants and agreements contained in it or secured by it.
74 See 2012 Report, supra note 1, at 241. 75 See Illustrative Opinion Letter, infra para. 2.1. 76 Specific choice of law issues pertaining to express choice of law opinions are
discussed in Paragraph 3.9 of both the 2012 Report and in this Supplement. See 2012 Report, supra note 1, at 245–48. A limitation excluding a choice of law opinion is provided in Illustrative Opinion Letter Paragraph 4.6(v). See Illustrative Opinion Letter, infra para. 4.6(v).
There is a division of view as to whether and to what extent choice of law is addressed as an implied component of an enforceability opinion.77 There is greater accord that if an implicit choice of law opinion is not intended, the opinion giver should provide an express limitation to the enforceability opinion such as that suggested in the 2012 Report at 247. If an implicit opinion is not precluded by such a limitation, an assumption such as that stated in the 2012 Report at 248 would be included where applicable law supports it.
(2) When the law of the Local Opinion Jurisdiction is chosen to govern certain but not all aspects of the transaction documents, and the opinion giver is satisfied that selection of the law of the Local Opinion Jurisdiction will be honored by the courts of the Local Opinion Jurisdiction, a more explicitly limited form of the enforceability opinion would be:
To the extent the law of the State applies, giving effect to the choice of law provisions in the Transaction Documents choosing the law of the State but excluding choice of law rules, the Opinion Transaction Documents . . . are enforceable . . . .
Such a statement would be appropriate also when an express choice of law opinion will be provided.
(3) When transaction documents provide that they are to be governed by the law of a jurisdiction other than the Local Opinion Jurisdiction and a choice of law opinion is disclaimed, requests are sometimes made that an enforceabi

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